Chapter 42: Organization and Financial Structure of Corporations (SmartBook Assignment)
Arrange the steps of incorporation in the correct order: __________.
1. Preparation of the articles of incorporation 2. Signing and authentication of the articles of incorporation by one or more incorporators 3. Filing of the articles of incorporation with the secretary of state and the payment of fees 4. Receipt of a copy of the articles of incorporation and the fee receipt 5. Holding an organization meeting
Article ______ of the UCC states that a corporation has a duty to issue only the number of shares authorized by its articles.
8
__________ shareholders often occupy a position inferior to that of other investors, notably creditors and preferred shareholders.
Common
____________ have no function beyond lending their names to the process of bringing a corporation into existence.
Incorporators
Subchapter S of the ____________ limits the number of shareholders an S corporation may have.
Internal Revenue Code
The steps of a corporation's formation appear in the __________.
MBCA
The ____________ permits the issuance of shares for a promoter's preincorporation services?
Model Business Corporation Act
____________ has/have the power to issue shares on behalf of a corporation.
The board of directors
Under the Model Business Corporation Act, subscriptions do not have to be in writing to be ___________.
enforceable
A promoter owes a _____ duty to a corporation and to its prospective investors.
fiduciary
The _______________ ensures the existence of a corporation.
filing of articles by the secretary of state
Two main duties and responsibilities of a promoter are: (Choose two correct answers)
finding people willing to invest in the business. incorporating the business.
The basic governing document of a corporation is the articles of ____________.
incorporation
The Model Business Corporation Act gives the ____________ the power to adopt the initial bylaws.
incorporators
The Model Business Corporation Act specifies that one or more persons such as corporations and partnerships may serve as the ____________ of the entity.
incorporators
A(n) ___________ may be used to exclude unwanted persons from a corporation.
provision disqualifying purchasers
A(n) ___________ allows a corporation the right to match the offer that a selling shareholder receives for his shares.
right of first refusal
Every business corporation issues equity securities, which are commonly called ___________.
shares
A(n) __________ account records the product of the number of shares outstanding multiplied by the par value of each share.
stated capital
Along with the corporation, ____________ should agree to release a promoter from liability.
third parties
Modern statutes restrict the free ___________ of shares in a publicly held corporation.
transferability
Repurchased shares may be restored to ____________ status instead of being canceled. If this is done, the shares are merely authorized and they may be reissued at a later time.
unissued
Most courts impose ______ liability of a partner only on those who are ______ in the management of the business or who are responsible for the defects in its organization.
unlimited contractual; actively engaged
Corporation statutes permit the use of option agreements, rights of first refusal, and buy-and-sell agreements with ____________ restrictions.
virtually no
When a board impermissibly overvalues the consideration for shares, a shareholder receives ___________ shares.
watered
A(n) ____________ is the preferred transfer restriction for nearly every context in a well-planned close corporation.
A buy-and-sell agreement
____________ provisions are those that a corporation statute states shall or must be done or those that are necessary to protect the public interest.
Mandatory
___________ have generally been held illegal as unduly restricting the powers of the board of directors.
Mandatory dividend rights
The _________ states that incorporation occurs when the articles are filed by the secretary of state.
Model Business Corporation Act
According to the ____________, persons who act on behalf of a corporation knowing there is no corporation are jointly and severally liable for all liabilities created while so acting.
Model Nonprofit Corporation Act
The ___________ regulates the issuance of securities.
Uniform Commercial Code
__________ are options evidenced by certificates.
Warrants
The concept of _________ is similar to the agency concept of ratification.
adoption
A preincorporation contract that states "the promoter's liability on this contract shall terminate upon the corporation's adoption of this contract" would be an example of a(n) __________ clause.
automatic novation
A(n) ___________ corporation exists despite the lack of an organization meeting or the failure to make a duplicate filing of the articles with a county recorder.
de facto
Identify two examples of defective attempts to incorporate: ____________. (Choose two correct answers)
failure to hold an organization meeting failure to file articles of incorporation
When a corporation and a third party agree to release a promoter from liability, a(n) ___________ occurs.
novation
Promoters sometimes use preincorporation __________ to ensure that a corporation will have adequate capital when it begins its business.
subscriptions
A(n) __________ requires a selling shareholder to obtain the consent of the corporation or its shareholders before she may sell her shares.
consent restraint
If a corporation complies with each mandatory provision, it is a(n) ___________.
de jure corporation
Under the MBCA, the ___________ always retain the power to amend the bylaws.
shareholders
Under the ____________, an offering of securities is exempt from registration if the offering is to a limited number of qualified investors.
Securities Act of 1933
One of the following is an incorrect statement regarding the incorporation of a nonprofit corporation. (Choose one correct answer)
Its articles of incorporation need not include its registered agent.
The only way a corporation may become bound on a promoter's preincorporation contracts is by the corporation's __________ of the promoter's contracts.
adoption
The filing of the _________ is conclusive proof of the existence of the corporation, except in a proceeding brought by the state.
articles
Under the MBCA, the preferences of preferred shareholders must be set out in the ___________.
articles of incorporation
Ordinarily, ____________ have the exclusive right to elect the directors, who manage the corporation.
common shareholders
A(n) __________ allows a preferred shareholder to exchange his preferred shares for another class of shares, usually common shares.
conversion right
One of the sources of funds available to a corporation is the sale of _________ securities, including shares, debentures, bonds, and long-term notes payable.
corporate
Transfer restrictions can be enforced against a shareholder, if they are contained in the ________ or the ______, and the _________ contain a notice of the restriction.
corporate bylaws shares articles of incorporation
The requirement of a valid statute under which a corporation could be organized is mandatory for a _____________.
de facto corporation
A(n) ___________ is formed when the promoters substantially comply with each of the mandatory conditions precedent to the incorporation of the business.
de jure corporation
Failure to comply with all the conditions for incorporation constitutes a(n) _________ attempt to incorporate.
defective
When a promoter is a(n) __________, approval of a transaction by the board of directors may not be sufficient.
director
Failure to file an annual report or pay the annual fee or tax may result in the ___________ of a corporation.
dissolution
A true statement about a promoter's release of liability would be that __________.
hird parties have a major role in releasing the liability of a promoter.
A promoter and his copromoters are ___________ liable on preincorporation contracts the promoter negotiates in the name of a nonexistent corporation.
jointly and severally
Unlike a for-profit corporation, a nonprofit corporation must state that it is either a: ______ corporation, a ______ corporation, or a religious corporation.
mutual benefit public benefit
Dividends on __________ preferred shares do not accumulate if unpaid.
noncumulative
For ___________ shares, only the current year's dividends must be paid to preferred shareholders prior to the payment of dividends to common shareholders.
noncumulative preferred
For a(n) ______ to occur, the corporation and the third party must agree to release the promoter from liability and to substitute the corporation for the promoter as the party liable on the contract.
novation
A(n) __________ agreement grants a corporation the right to buy a selling shareholder's shares at a price determined by the agreement.
option
The MBCA expressly permits the issuance of __________ for the purchase of a corporation's shares.
options
The board of directors is required to issue shares for an adequate dollar amount of consideration. Whether shares have been issued for an adequate amount of consideration depends in part on the ___________ value of the shares. The more important concern, however, is whether the shares have been issued for ___________ value. (Choose one correct answer)
par; fair
If people attempt to organize a corporation but their efforts are so defective that not even a corporation by estoppel is found to exist, the courts have generally held such persons to be _____________.
partners with unlimited liability for the contracts and torts of the business
According to the Model Business Corporation Act, _________ shareholders have no liability for the obligations of a defectively formed corporation even when they know that the corporation has not been formed.
passive
A(n) __________ subscription is a contract between a corporation and a subscriber at the time the subscription agreement is made.
postincorporation
In a corporation, ___________ are customarily given liquidation and dividend preferences.
preferred shareholders
The board must make decision in two areas before it issues a corporations shares: __________ and __________. (Choose two correct answers)
price consideration
Share options are often issued to top level managers as an incentive to increase the _________ of the corporation.
profitability
A ____________ is liable on the preincorporation contracts she negotiates in the name of the nonexistent corporation.
promoter
A(n) ________ is least likely to have liability on a contract when a business is incorporated prior to making any contracts.
promoter
A(n) __________ is self-appointed and acts for a corporation that is not in existence.
promoter
A(n) __________ of a corporation incorporates the business, organizes its initial management, and raises its initial capital.
promoter
To limit his liability, the __________ may wish to have her liability cease automatically upon _________. (Choose two correct answers)
promoter adoption
When a nonprofit corporation is defectively formed, ______________ have personal liability for the business.
promoters
The validity of a de jure corporation cannot be attacked, except in a(n) __________ proceeding, in which a state may attack the corporation for noncompliance with a condition subsequent to incorporation.
quo warranto
To protect creditors and other shareholders, state corporation statutes require legal consideration to have __________.
real value
The Model Business Corporation Act authorizes transfer restrictions for any ___________ purpose.
reasonable
The MBCA permits shares to be issued in return for any tangible or intangible property or benefit to the corporation, including: __________. (Check three correct answers)
securities of the corporation cash promissory notes services performed for the corporation
Under the terms of a(n) __________, a prospective shareholder promises to buy a specific number of shares of a corporation at a stated price.
share subscription
According to the Model Business Corporation Act, the ultimate owners of a corporation are the ____________.
shareholders
The following are liable to a corporation when there is a watered shares problem: ____________. (Choose two correct answers)
shareholders the board of directors
Under the Model Business Corporation Act, a prospective shareholder may not revoke a preincorporation subscription for _______ months.
six
Preferred shares have __________ rights, unless the articles provide otherwise.
voting
____________ are most likely to be the owners of a corporation if the corporation has issued equity securities.
Shareholders
Match the types of shares (left column) with their definitions (right column).
Authorized shares > Shares that a corporation is permitted to issue by its articles of incorporation Issued shares > Shares that have been sold to shareholders Outstanding shares > Shares that are currently held by shareholders
__________ provisions are those that "may" be done and that are unnecessary to protect the public interest.
Directory
Which of the following statements is incorrect regarding the enforcement of a preincorporation contract?
Once the corporation has adopted the contract, the corporation and the third party are not liable on it.
____________ shares may be voted at a shareholders' meeting.
Outstanding
Under the Model Business Corporation Act, who is liable for defective incorporation in the following scenarios? (Choose two correct answers.)
Shareholders who know that a corporation does not exist and participate in the operational decisions of a business Managers who participate in the operation of a business and know that a corporation does not exist
___________ may receive warrants as part of their compensation for aiding a corporation in selling its shares to the public.
Underwriters
Once the corporation has __________ the contract, the corporation and the third party are liable on it, and the contract cannot be __________ without the consent of both parties. (Choose two correct answers)
adopted rescinded
Corporate securities can include of these except: __________. (Choose one correct answer)
bank loans
The __________ holds the power to repeal and to amend the bylaws.
board of directors
A(n) ___________ compels a shareholder to sell his or her shares to the corporation or to the other shareholders at the price stated in the agreement.
buy-and-sell agreement
A(n) ___________ is used to preserve a close corporation.
consent restraint
Promoters substantially complying with each of the ____________ to the incorporation of a business leads to the formation of a de jure corporation.
mandatory conditions precedent
Which of the following is an incorrect statement regarding the incorporation process? (Choose one correct answer)
Because many businesses qualify to incorporate under federal law, that option is often exercised.
___________ shares do not exist.
Canceled
Of the following statements which choose one that is most accurate regarding the quantity of consideration for shares. (Choose one correct answer)
Fair value is more important that par value in determining whether shares have been issued for an adequate amount of consideration.
A corporation should do two things to retain its status as a corporation in good standing: ____________. (Choose two correct answers)
Pay an annual franchise tax File an annual report with the secretary of state
___________ subscriptions are share subscriptions that close corporations may use when they seek to sell additional shares after incorporation.
Postincorporation
A strategy employed by a well-advised promoter who intends to limit her liability on a contract include: __________. (Choose one correct answer)
incorporating the business prior to making any contracts
The __________ of a share certificate on its back by its registered owner and the __________ of the certificate to another person transfers ownership of the shares to the other person.
indorsement delivery
Rights are most often issued in connection with a(n) __________ right requirement.
preemptive
Of all the corporation entities, the _____________'s free transferability of shares is a threat to the balance and power among shareholders.
close corporation
An offering of securities is exempt from registration if the offering is to a limited number of qualified investors, usually ____________ financially sophisticated investors.
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___________ subscriptions refer to the written share subscriptions that are used by promoters in the course of selling shares of a proposed corporation to ensure that equity capital will be provided once the corporation comes into existence.
Preincorporation
___________ are not contracts binding on a corporation and its shareholders until the corporation comes into existence and its board of directors accepts the share subscriptions.
Preincorporation subscriptions
__________ are short-term certificated _________ that are usually transferable.
Rights, options
A(n) ____________ may be used to determine who should be required to sell and who would be required to buy shares in case of a severe disagreement between shareholders that threatens the profitability of the corporation.
buy-and-sell agreement
A(n) _____________ obligates a corporation to buy a selling shareholder's shares at a price stated in an agreement.
buy-and-sell agreement
A consideration received by a corporation for its equity securities appears in the ___________ accounts in the shareholders' equity section of the corporation's balance sheet.
capital
The board of directors must exercise care to ensure that the corporation receives the ___________ value of the shares it issues.
fair
An optional inclusion in the articles of incorporation would be the ____________.
purpose of the corporation
When corporate shares are issued in registered form, they are ____________.
registered with the corporation in the name of a specific person